Crowd Funding - Nurturing New Ideas

Posted in Finance Articles, Total Reads: 1648
, Published on 19 December 2014

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As a young Indian, I always want India to be filled with people of new innovative, creative and productive ideas and thoughts. And I strongly believe that if these thoughts can be made into actions with the advancements in Information technology, it can heal India’s soaring problems like unemployment, illiteracy to an extent. But recent reports on India’s ‘ease of doing business’ rankings is very alarming. Even after 20 years of economic reforms, India slipped from 131st position in 2013 to 134th position in 2014.Among BRICS countries, India is doing the worst. And among the issues faced by Small, Medium Enterprises which includes startups, credit issues is a main concern. In a recent secondary research done by me in finding credit issues of SMEs, results showed that out of all SMEs, 92.77% have no finance or self-finance. This has really affected the growth of SMEs in India. Even after increase in number of venture capitalists/angel investors to protect new ideas, this result shows that time has been exceeded to find a sustainable solution for this issue.

It is said that: “The mob rushes in where individuals fear to tread” by B.F. Skinner in Walden Two.This has proved true, with the arrival of new idea of financing: ’Crowd Funding’. Crowd funding is:”the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the internet to support efforts initiated by other people or organizations”. In crowd funding, fundraising is coordinated and administered by online network platforms, through which investments or donations are made. Even if the project is of aiming financial return or no financial return, fundraising can be done through Crowd Funding.

Image Courtesy: freedigitalphotos.net, cuteimage

Types of Crowd Funding

Crowd funding is of mainly three types: Donation, debt and equity

Donation crowd funding:

People contribute money to a project, expecting nothing in return. Mainly for projects of a social cause, this may be in a roller coaster of having no fund, crowd funding helps. In return of investing, these projects will offer donators, tickets to event, acknowledgments in poster or magazines etc.

In debt crowd funding investors will get interest in return for the amount of money they invest. It is also called peer-to-peer lending or lend-to-save. It can also be microfinance, where money is lent to very small businesses, where investors do not expect interest in return.

In equity crowd funding, people invest in projects expecting equity in return. People invest for a share in the project or business or venture. Like that of share market if business does well, share values will go up, else investors will make loss.

. Less tedious than other fundraising processes so that entrepreneurs can concentrate mainly on their business. Mostly crowd funding campaign takes about a month to get investment. So it is very much easier than getting a fund from venture capitalists or banks .

. Use of online platform helps in getting more number of people to invest, so that businesses get more initial capital. This diversification of investment is good for management as they are now not restricted under small number of parties.

. Many ideas will get funded and it gives an encouragement for those people with high creativity, invention etc.. Even your business becomes successful or not, you will get feedback. Invested amount by people will tell you if you have come with an idea that can capture minds of people or else it needs some tweaking to get well received by the people.

. To attract investors, businesses need to pitch in their ideas and hence marketing is essential. If they could market their ideas very well, this will help them in spreading about their company in early stage and hence faster growth in smaller time. Hence crowd funding helps in creating a brand image before it launches.

. It introduces prospective loyal customers as those who are willing to contribute money to their business will be early adopters. These early adopters will spread the idea to their friend and hence gets more coverage.

. Crowd funding offers a free PR as crowd funding campaigns attract attention from various media sources , who are hungry for successful stories. If media sources take these ideas and publish, it is sure that your business has a high chance of become successful.

. It’s free that there is no fee to participate in this and if fund raising project becomes successful, everyone wins and gets an opportunity to be a part of a successful project. And when it become successful, average commission for the platform is around 5% of total funds raised.

Is there a need to be worried about crowd funding?

Like a coin which has two sides, crowd funding also has some issues associated with it, which is minimal compared to its benefits. They are:

. If you have raised over 1 million in an year through equity crowd funding, you cannot seek additional funds for next 1 year. To do so you must comply with some security requirements

. It can have negative impact on other financing options as angel investors/ venture capitalists will not like to invest their money in a firm which is owned by hundred’s or thousand’s of crowd funding investors.

. Sometimes the reputation of company will be at stake that crowd funding websites will show whether your website is a failure or successful.

. As number of investors increases, pressure of making the business a successful one also increases. All investors will be in hope that the business will get launched soon. Hence it adds pressure on you to launch business within months of the end of campaign.

. Hidden costs will be there as creators will offer extra rewards without thinking about extra costs.

Also some may end up in offering rewards with price more than planned earlier.

Risks for Investors?

There is no doubt that crowd funding can be a risky business. Because there is no doubt that investors will receive a return. Even though you may receive a share of a business or a project, if more shares are issued, your investment could be diluted. You should not expect a sudden return for your investment. You will get benefitted only when the business floats on the stock market. Also as crowd fund money is illiquid here, it will be impossible to claim back money invested or have it converted back into cash. There is no secondary market to sell your shares or crowd funding investment.

But there are many regulations put forth by governments to keep them safer and more secure. Hence this gives a relief to risks associated with crowd funding.

Conclusion

Crowd funding offers an excellent way for entrepreneurs to receive funding ,financing and exposure for their ventures to grow. Till now it has given birth to many entrepreneurial businesses and it is expected to grow in number in the coming years. Even though it has some bane associated with it, but with the advantages that it has got with, crowd funding will offer an excellent idea to get funded for new businesses.